8.1 – Intrinsic Value

The moneyness of an option contract is a classification method wherein each option (strike) gets classified as either – In the money (ITM), At the money (ATM), or Out of the money (OTM) option. This classification helps the trader to decide which strike to trade, given a particular circumstance in the market. However before we get into the details, I guess it makes sense to look through the concept of intrinsic value again.

The intrinsic value of an option is the money the option buyer makes from an options contract provided he has the right to exercise that option on the given day. Intrinsic Value is always a positive value and can never go below 0. Consider this example –

Underlying

CNX Nifty

Spot Value

8070

Option strike

8050

Option Type

Call Option (CE)

Days to expiry

15

Position

Long

Given this, assume you bought the 8050CE and instead of waiting for 15 days to expiry you had the right to exercise the option today. Now my question to you is – How much money would you stand to make provided you exercised the contract today?

Do remember when you exercise a long option, the money you make is equivalent to the intrinsic value of an option minus the premium paid. Hence to answer the above question we need to calculate the intrinsic value of an option, for which we need to pull up the call option intrinsic value formula from Chapter 3.

Here is the formula –

Intrinsic Value of a Call option = Spot Price – Strike Price

Let us plug in the values

= 8070 – 8050

= 20

So, if you were to exercise this option today, you are entitled to make 20 points (ignoring the premium paid).

Here is a table which calculates the intrinsic value for various options strike (these are just random values that I have used to drive across the concept) –

Option Type

Strike

Spot

Formula

Intrinsic Value

Remarks

Long Call

280

310

Spot Price – Strike Price

310 – 280 = 30

Long Put

1040

980

Strike Price – Spot Price

1040 -980 = 60

Long Call

920

918

Spot Price – Strike Price

918 – 920 = 0

Since IV cannot be -ve

Long Put

80

88

Strike Price – Spot Price

80 – 88 = 0

Since IV cannot be -ve

With this, I hope you are clear about the intrinsic value calculation for a given option strike. Let me summarize a few important points –

Intrinsic value of an option is the amount of money you would make if you were to exercise the option contract

Intrinsic value of an options contract can never be negative. It can be either zero or a positive number

Call option Intrinsic value = Spot Price – Strike Price

Put option Intrinsic value = Strike Price – Spot price

Before we wrap up this discussion, here is a question for you – Why do you think the intrinsic value cannot be a negative value?

To answer this, let us pick an example from the above table – Strike is 920, spot is 918, and option type is long call. Let us assume the premium for the 920 Call option is Rs.15.

Now,

If you were to exercise this option, what do you get?

Clearly we get the intrinsic value.

How much is the intrinsic value?

Intrinsic Value = 918 – 920 = -2

The formula suggests we get ‘– Rs.2’. What does this mean?

This means Rs.2 is going from our pocket

Let us believe this is true for a moment, what will be the total loss?

15 + 2 = Rs.17/-

But we know the maximum loss for a call option buyer is limited to the extent of premium one pays, in this case it will be Rs.15/-

However if we include a negative intrinsic value this property of option payoff is not obeyed (Rs.17/- loss as opposed to Rs.15/-). Hence in order to maintain the non linear property of option payoff, the Intrinsic value can never be negative

You can apply the same logic to the put option intrinsic value calculation

Hopefully this should give you some insights into why the intrinsic value of an option can never go negative.

8.2 – Moneyness of a Call option

With our discussions on the intrinsic value of an option, the concept of moneyness should be quite easy to comprehend. Moneyness of an option is a classification method which classifies each option strike based on how much money a trader is likely to make if he were to exercise his option contract today. There are 3 broad classifications –

In the Money (ITM)

At the Money (ATM)

Out of the Money (OTM)

And for all practical purposes I guess it is best to further classify these as –

Deep In the money

In the Money (ITM)

At the Money (ATM)

Out of the Money (OTM)

Deep Out of the Money

Understanding these option strike classification is very easy. All you need to do is figure out the intrinsic value. If the intrinsic value is a non zero number, then the option strike is considered ‘In the money’. If the intrinsic value is a zero the option strike is called ‘Out of the money’. The strike which is closest to the Spot price is called ‘At the money’.

Let us take up an example to understand this well. As of today (7th May 2015) the value of Nifty is at 8060, keeping this in perspective I’ve take the snapshot of all the available strike prices (the same is highlighted within a blue box). The objective is to classify each of these strikes as ITM, ATM, or OTM. We will discuss the ‘Deep ITM’ and ‘Deep OTM’ later.

As you can notice from the image above, the available strike prices trade starts from 7100 all the way upto 8700.

We will first identify ‘At the Money Option (ATM)’ as this is the easiest to deal with.

From the definition of ATM option that we posted earlier we know, ATM option is that option strike which is closest to the spot price. Considering the spot is at 8060, the closest strike is probably 8050. If there was 8060 strike, then clearly 8060 would be the ATM option. But in the absence of 8060 strike the next closest strike becomes ATM. Hence we classify 8050 as, the ATM option.

Having established the ATM option (8050), we will proceed to identify ITM and OTM options. In order to do this we will pick few strikes and calculate the intrinsic value.

7100

7500

8050

8100

8300

Do remember the spot price is 8060, keeping this in perspective the intrinsic value for the strikes above would be –

@ 7100

Intrinsic Value = 8060 – 7100

= 960

Non zero value, hence the strike should be In the Money (ITM) option

@7500

Intrinsic Value = 8060 – 7500

= 560

Non zero value, hence the strike should be In the Money (ITM) option

@8050

We know this is the ATM option as 8050 strike is closest to the spot price of 8060. So we will not bother to calculate its intrinsic value.

@ 8100

Intrinsic Value = 8060 – 8100

= – 40

Negative intrinsic value, therefore the intrinsic value is 0. Since the intrinsic value is 0, the strike is Out of the Money (OTM).

@ 8300

Intrinsic Value = 8060 – 8300

= – 240

Negative intrinsic value, therefore the intrinsic value is 0. Since the intrinsic value is 0, the strike is Out of the Money (OTM).

You may have already sensed the generalizations (for call options) that exists here, however allow me to restate the same again

All option strikes that are higher than the ATM strike are considered OTM

All option strikes that are below the ATM strike are considered ITM

In fact I would suggest you relook at the snapshot we just posted –

NSE presents ITM options with a pale yellow background and all OTM options have a regular white background. Now let us look at 2 ITM options – 7500 and 8000. The intrinsic value works out to be 560 and 60 respectively (considering the spot is at 8060). Higher the intrinsic value, deeper the moneyness of the option. Therefore 7500 strike is considered as ‘Deep In the Money’ option and 8000 as just ‘In the money’ option.

I would encourage you to observe the premiums for all these strike prices (highlighted in green box). Do you sense a pattern here? The premium decreases as you traverse from ‘Deep ITM’ option to ‘Deep OTM option’. In other words ITM options are always more expensive compared to OTM options.

8.3 – Moneyness of a Put option

Let us run through the same exercise to find out how strikes are classified as ITM and OTM for Put options. Here is the snapshot of various strikes available for a Put option. The strike prices on the left are highlighted in a blue box. Do note at the time of taking the snap shot (8th May 2015) Nifty’s spot value is 8202.

As you can see there are many strike prices available right from 7100 to 8700. We will first classify the ATM option and then proceed to identify ITM and OTM option. Since the spot is at 8202, the nearest strike to spot should be the ATM option. As we can see from the snapshot above there is a strike at 8200 which is trading at Rs.131.35/-. This obviously becomes the ATM option.

We will now pick a few strikes above and below the ATM and figure out ITM and OTM options. Let us go with the following strikes and evaluate their respective intrinsic value (also called the moneyness) –

7500

8000

8200

8300

8500

@ 7500

We know the intrinsic value of put option can be calculated as = Strike – Spot

Intrinsic Value = 7500 – 8200

= – 700

Negative intrinsic value, therefore the option is OTM

@ 8000

Intrinsic Value = 8000 – 8200

= – 200

Negative intrinsic value, therefore the option is OTM

@8200

8200 is already classified as ATM option, hence we will skip this and move ahead.

@ 8300

Intrinsic Value = 8300 – 8200

= +100

Positive intrinsic value, therefore the option is ITM

@ 8500

Intrinsic Value = 8500 – 8200

= +300

Positive intrinsic value, therefore the option is ITM

Hence, an easy generalization for Put options are –

All strikes higher than ATM options are considered ITM

All strikes lower than ATM options are considered OTM

And as you can see from the snapshot, the premiums for ITM options are much higher than the premiums for the OTM options.

I hope you have got a clear understanding of how option strikes are classified based on their moneyness. However you may still be wondering about the need to classify options based on their moneyness. Well the answer to this lies in ‘Option Greeks’ again. As you briefly know by now, Option Greeks are the market forces which act upon options strikes and therefore affect the premium associated with these strikes. So a certain market force will have a certain effect on ITM option while at the same time it will have a different effect on an OTM option. Hence classifying the option strikes will help us in understanding the Option Greeks and their impact on the premiums better.

8.4 – The Option Chain

The Option chain is a common feature on most of the exchanges and trading platforms. The option chain is a ready reckoner of sorts that helps you identify all the strikes that are available for a particular underlying and also classifies the strikes based on their moneyness. Besides, the option chain also provides information such as the premium price (LTP), bid –ask price, volumes, open interest etc for each of the option strikes.

Have a look at the option chain of Ashoka Leyland Limited as published on NSE –

Few observations to help you understand the option chain better –

The underlying spot value is at Rs.68.7/- (highlighted in blue)

The Call options are on to the left side of the option chain

The Put options are on to the right side of the option chain

The strikes are stacked on an increasing order in the center of the option chain

Considering the spot at Rs.68.7, the closest strike is 67.5, hence that would be an ATM option (highlighted in yellow)

For Call options – all option strikes lower than ATM options are ITM option, hence they have a pale yellow background

For Call options – all option strikes higher than ATM options are OTM options, hence they have a white background

For Put Options – all option strikes higher than ATM are ITM options, hence they have a pale yellow background

For Put Options – all option strikes lower than ATM are OTM options, hence they have a white background

The pale yellow and white background from NSE is just a segregation method to bifurcate the ITM and OTM options. The color scheme is not a standard convention.

8.4 – The way forward

Having understood the basics of the call and put options both from the buyers and sellers perspective and also having understood the concept of ITM, OTM, and ATM I suppose we are all set to dwell deeper into options.

The next couple of chapters will be dedicated to understand Option Greeks and the kind of impact they have on option premiums. Based on the Option Greeks impact on the premiums, we will figure out a way to select the best possible strike to trade for a given circumstance in the market. Further we will also understand how options are priced by briefly running through the ‘Black & Scholes Option Pricing Formula’. The ‘Black & Scholes Option Pricing Formula’ will help us understand things like – Why Nifty 8200 PE is trading at 131 and not 152 or 102!

I hope you are as excited to learn about all these topics as we are to write about the same. So please stay tuned.

Onwards to Option Greeks now!

Key takeaways from this chapter

The intrinsic value of an option is equivalent to the value of money the option buyer makes provided if he were to exercise the contract

Intrinsic Value of an option cannot be negative, it is a non zero positive value

Intrinsic value of call option = Spot Price – Strike Price

Intrinsic value of put option = Strike Price – Spot Price

Any option that has an intrinsic value is classified as ‘In the Money’ (ITM) option

Any option that does not have an intrinsic value is classified as ‘Out of the Money’ (OTM) option

If the strike price is almost equal to spot price then the option is considered as ‘At the money’ (ATM) option

All strikes lower than ATM are ITM options (for call options)

All strikes higher than ATM are OTM options (for call options)

All strikes higher than ATM are ITM options (for Put options)

All strikes lower than ATM are OTM options (for Put options)

When the intrinsic value is very high, it is called ‘Deep ITM’ option

Likewise when the intrinsic value is the least, it is called ‘Deep OTM’ option

The premiums for ITM options are always higher than the premiums for OTM option

The Option chain is a quick visualization to understand which option strike is ITM, OTM, ATM (for both calls and puts) along with other information relevant to options.

325 comments

Hi kartik,
Thanks for new chapter. You have magical writing power which makes the learning so interesting and easy. I completely understood the concept of this chapter and very excited for next chapter.

Hi kartik
If I place an order to buy nifty8050CE at premium of 100 with a trailing stop loss of 100 points. After sometime premium is 120, can I modify my trailing stop loss to 80 points or 60 points or can I square off my position at current price

sir.when trading options which graph should we look into,is it nifty ce,pe we r in or spot.bcoz as chart trader iam confused which chart to follow, as and every strikewill hav diff setup,trading cycolegy greeks lot more,got it

cannot agree. it is important to keep an eye on spot while watching the option chart in 3minute frame and also watch the support and resistances in 3mntf. during. opening moves. option chart will respond. immediately to changes in underlying. after 10:15a.m. sluggish response, until lunch time or two thirty when actual operational intension of the day is displayed. then. another bout of responsivenes near close at 3:10. or. thereabout. by the way elliott waves can be seen in option charts

Hi Karthik, the bid-ask spread for the Nifty is quite close; and when I square off an order at market price, there are no major surprises. But with the Bank Nifty, there is a huge difference between the LTP and the market price. So while trading larger volumes, is it safer to trade Nifty?

Well the bid – ask spread for both Nifty and BankNifty are quite the same 🙂

Do this –

1) Take the difference between the bid and ask (this is called the spread)
2) Divide the spread by the average of Bid and Ask
3) Express this as a %

If you do this you will realize the % is almost the same (ard 0.015%).

The spread is tight when liquidity is abundant. In simpler words – when there are more people trading a particular contract liquidity improves and therefore the spreads get better (it gets tighter). Tighter spreads imply lesser damage when you place market orders (lesser surprise). You may also want to read about ‘Impact Cost’ here – http://zerodha.com/varsity/chapter/nifty-futures/ section 9.2

Karthik, I was asking about the spread in absolute terms (not percentage). With Bank Nifty options, I see a difference of over 10 rupees between the bid price and the ask price onscreen. A few days ago, before I squared off my (Bank Nifty options) positions, the screen showed a decent profit (which was calculated on the LTP I suppose); but when I hit the button to square off, I ended up with a loss 🙁 This hasn’t happened when I’ve traded Nifty options.

Thanks a lot for this information.
Even 700 shares of nifty CE/PE option per trade is quite more than future market.
Also one thing that I want to ask is – approximately nifty daily change is of 100 points (day’s high- day’s low) ,is the same change is observed in the premium’s of ATM strike price of nifty options or other stock options like idea cellular????

The lot of 25 is fixed for both futures and options. I think 700 came about because one of the comments posted earlier. Also, it may not be safe to assume 100 point daily moment in Nifty. The change in premium based on the change is underlying is captured by delta…which is the focus in chapter 9.

PLEASE USE A SPREAD SHEET, DOWN LOAD NIFTY OHLC DATA.NEXT, CALCULATE HIGH – CLOSE AND OPEN-CLOSE.
TAKE THE AVERAGE FOR THESE TWO COLUMNS FOR AT LEAST 100 DAYS. WILL GIVE YOU AN IDEA ABOUT THE
DAILY RANGE.

Hi Karthik, as always an excellent job in explaining concepts of options and futures. I have a question which is probably related to next chapter but it would be great if you could answer them. When calculating the delta for any option, what values of historical volatility do we take? Where can I get this data from?
The other question is a few days ago put option volatility(around 24%) was higher than average volatilty (18.23% ,this data I got from one of the option tools I use) and the premium of put options eroded quickly, and since yesterday the put option volatility has come down near the average range but the call option volatility has dropped to around 13% while average and put volatilities are around 18%. Call option premiums decayed quickly. So can we generalise this into saying when Average volatility>Call volatility ,calls are being written and it may be the right time for me to write calls whereas when Put volatility is greater than average volatility put options are being written and perhaps we can write some too? I hope you understand my question. Again the details of the volatility I got from the option tool I use.

Delta can be calculated using a simple Black & Scholes option calculator. You don’t really need historical volatility for this. Also, historical volatility can be calculated very easily – I will explain the same in chapter 11 or 12 of this module.

With volatility % like 18% and 24% you must be referring to bank Nifty (or some other Index) if I’m not wrong. Anyway, whenever current volatility > Average volatility …and you expect the volatility to drop ..you should look at option writing opportunities and thereby collecting the premiums. Likewise whenever current volatility < Average volatility ...and you expect the volatility to increase..you should look at option buying opportunities. This is because the option premium increases/decreases with increase/decrease in volatility.
Also, dont mix up call and put volatility. Treat them separate and clutter free for a clear understanding. Of course more on this topic in the subsequent chapters.

Karthik, I use an excel sheet which was given to me by a friend(custom made) where it asks for Historical Volatility to calculate the Greeks and Theoretical option prices( I guess it is Black Scholes Model).
For average volatility I use data from FOVOLT.csv files from NSE. When I meant “PE Volatility” and “CE Volatility” it is the average values of the top 5- 6 PE.CE strikes .
Anyway in your explanation what do you mean by “current volatility” and “Average volatility”? I mean, what values are we using here? Also can you let me know where does India VIX fit in all these?
Thanks for your help!! You are doing a wonderful job!!

Current Volatility is the volatility in the market as of now while the average volatility is historical average volatility. This can be a bit confusing now, but we will discuss these in detail over the next few chapters…so you should have greater clarity then.

Hi,
As we know from previous chapter that an option can’t be exercised before expery date. Why do you mention to exercise it before expery date in this chapter.
If one can exercise before expery then
What will happen if I write an option which is in the money and someone exercised it? Profit or loss

It was a deliberate statement, an assumption to drive the point across – here is what I’ve mentioned

“Given this, assume you bought the 8050CE and instead of waiting for 15 days to expiry you had the right to exercise the option today. Now my question to you is – How much money would you stand to make provided you exercised the contract today? ”

So in reality this does not happen in Indian markets as all options are European in nature.

Hi Karthik, what is the difference between settle price and closing price?? e.g. on 15 July BHel 180CE has a closing price of 2.90 and settle price of 11.40. (Expiry 27 august). Also, what CE an CA in call options??

Guessed as much. Anyway settlement price reflects the last closing price…if the contract has not traded today (due to liquidity concerns) then the settlement price reflects the previous the most recent closing price and that could be 2 days before. Hence the difference.

Hi Karthik,
a small and a silly doubt.
for trading equity, we see spot price charts, for futures we have particular futures chart. On these two we apply TA and predict a direction for the market movement. For options, I read in few places, we should not apply TA, then are we deciding the direction by observing the primary or intermediate markets or news is it based or just the instincts? To trade options, I understand from your writings, options greeks will help us select a proper strike rate after which we’l be benefitted. But how to select bullish or bearish firmly???
thanks in advance.

LADY, TAKE A LOOK AT INTRA-DAY OPTIONS IN 3MNT FRAME . LOCATE SUPPORT AND RESISTANCE LOCATIONS.
USE OPTION CHARTS. TRY 8PERIOD STOCHASTICS IN 3MNTFS. LOOK FOR A ELLIOTT WAVE STRUCTURES INTRA-DAY.
FREQUENTLY ELLIOTT WAVE STRUCTURES TURN UP EVEN IN INTRA-DAY. ABOVE ALL USE STOP LOSS COMPULSARILY.
JUST AS MEDICINE IS MULTIDISCIPLINARY (PHYSIOLOGY,ANATOMY, PHARMACOLOGY,ORGANIC PATHWAYS AND WHAT NOT) SO IS TRADING. REMEBER, A CHART CANNOT PREDICT A NORTH KOREAN MISSILE LAUNCH. HENCE THE
STOPLOSS ORDER FOR EVERY TRADE.

Hi Karthik,
one silly doubt, for spot and futures trading, seeing the respective charts we apply TA to find some candle stick pattern and predict market direction. I have read in few places, for options we should not apply TA. From your writings I understand options greeks will help us select the strike rate properly, hence we can be profited. but my doubt is, how will we select call or put, bullish or bearsish? by observing primary or intermediate market direction? news or instincts? very basic, after too much of reading I am confused. thanks

Priya to get a directional sense you can depend on TA or FA, once you develop a direction sense you can either use Futures or Options to leverage your directional view. Also to get I would suggest you read this chapter – http://zerodha.com/varsity/chapter/getting-started/ I guess this will give you an orientation

Your efforts in explaining the nitty gritty of each and every concept is highly appreciated that to with example. For instance till today I was only knowing that Intrinsic value of options cannot be -ve.. But why it can’t be -ve is what I came to know from this chapter. You and your team are doing awesome job with VARSITY knowledge sharing. Thanks

what role intrinsic value plays in deciding premium price of an option? why above ashok leyland example show IV 45.72 for the strike price 67.50 for the spot price 68.70. it should be 68.70-67.50=1.20. am i correct?

Shreya – Option Premium can be split as Time value + Intrinsic value….so clearly intrinsic value plays an important role. The IV you are referring to in the option chain stands for implied volatility and not intrinsic value 🙂

Hi Karthik, based on the result expectations of HPCL i had gone long by buying a far OTM CE 1100 option.the stock then was at 950. now, the results were fantastic but, the stock corrected as if there is no tomorrow. the delta of the option was 0.09 and i was expecting the stock to move by 50 points . this would give me a leg up of 4.5 points as far as the premium was concerned( 0.09 * 50). i brought the call at 4 and now its less than 1. my question is with almost all stocks the price does go up after a favorable result. here though it was a good result the stock fell. i have attached the chart for you, can you point out what could the reasons be for such a fall? thanks.

Madhu – This is a very typical reaction. If the results are generally anticipated to be good, then the stock runs up before the result announcement in the backdrop of the announcement. Once the announcement is made people book profits and liquidate their positions. However if the results are expected to be bad or avergae but the company surprises with good set of numbers…then the stock usually tends to rally.

Firstly Thanks to Zerodha in general and a big thanks to you in specific for making things as simple as possible. 
I am still learning dynamics of options trading. Can you please take look at my below trade which went very bad. I also know many would have come across such situation.

1. I had bought PUT(15 Rs) and CALL(19Rs) both options as a hedge and I knew there would be one side move on 18th Sep post fed outcome.
Then opening was as expected on 18th Sep Nifty was at 120+, then I see both put and call prices nose diving(PUT fell by 82% and CALL fell by 42%). What happened here?
2. I know it’s out of the money options and close to expiry. I have noticed in similar situations when Nifty opens 120+ even out of the money CALL option would jump by 200%. correct? what happens here?
3. It was so pathetic, So how do we have some idea of such situations a day prior so we could exit at least. What metrics would help – volumes, open interest, etc? looking forward to your reply. Thanks.

This is quite common Suraj. Whenever an even is lined up, the volatility shoots up, therby driving the option premiums (for both calls and puts) very high. As soon as event is over the premiums drop since the volatility drops. Add to this the fact that expiry is close…the OTM options tend to fall even more. I would suggest you read up the chapter on vega to appreciate this better.

1) Can you share the data, will be much easier for me to go through the details.
2) This is because of liquidity. OTM options are less liquid hence the bid ask spread is wider. Higher the liquidity in the contract, lower is the bid ask spread.

1) sir , i did not take the screen shot but i shall try to make same study today as well . but did u get my point ? surprisingly such was not the case with nifty JAN16 options ….. in here all out of the money , in the money options stayed bullish same as the underlying .

2) in case of OTM options how to benefit from (HIGH BID-ASK SPREAD) when buying & how to benefit / safeguard / get a fair selling value when we decide to sell ?

Hi ,
I have been going through the Varsity modules and would like to appreciate the kind of efforts must have put for its creation and the way it has been presented. People who have no exposure or knowledge of Derivatives would surely benefit from it and would go a long way towards making them good traders.
Hats off Zerodha team. God bless you all.

Hi Karthik bro,
One question – How can I get Nifty 28Jan2016 chart in kite(i.e. with premium in Y-axis and date/time in x-axis). I mean what do I search in the search box to get it in the “market watch”.

small doubt (if) i bought NIFTY16FEB7500CE @79, 2 lots (lot size 75) on 9:30am and sell it on 2:00pm
need cash – 79*150 = 11850
if yes than profit is 125*150=18750-11850=6900 ??
am i correct or not waiting for reply Thanks in advance

First of all let me thank you for this enlightenment, you know how to write stuff. Putting Bollywood analogy with simplified version of stock market makes these articles great. The more I read the more curious I become.

I have loads of question I’ll try to sum up my understanding my making up story below. Please correct me if I understood incorrectly.

So basically there are 4 types of trades in options.
Call, Put, Short Call, Short Put.

Let’s take example of Ashok Leyland. Currently Ashok Leyland is trading at 90 in call option with premium of 2 INR. So if I buy Call current month option the break even would be 92? We expecting market is bullish here 
But as I trader I want to earn back my premium so I will short the same Call 90 option of current month. So I will get my premium back. i.e. 2 INR. I will immediately close this short call option trade or I will wait till or below before touching to 92.
So once I closed short call option now I have only call 90 option of Ashok Leyland. If the prize goes above 92 I will be in profit, if below 90 I will be in loss if it stays in between 90 to 92 I will be in break even.
This should be my strategy in the bullish market. Same goes for Call with Call short if market is bearish.

Please let me know if I am right? Please add up if it is possible to short call option immediately? I haven’t done real time option trading this is just reading about options & coming up with strategy to earn some profit. I want your insights as option trader for this strategy. Give me pros n cons if possible 🙂
Another question I see no one asking is we have 3 expiry dates in the every option i.e. Current month, next month, & Far month. For this time we have 25th Feb 2016, 31st March 2016, & 28th April expiry.
If I buy 31st march expiry same option in feb & if I get profit in same month i.e. feb, can I close this position in feb instead of waiting till march? Actually I didn’t get next month expiry logic.

& the last one basically Options are zero sum game, so if I wanted to buy call option there has to be put option buyer, right? So what does it mean open interest? I can see in every option tradable stock.

my implied understanding from options is that if there more people buying Call options then it means market expecting to go up & it should eventually goes up ( not necessarily) but I can say like this?

I’m really sorry for bombarding with loads of questions but I will be very grateful if you able to answer those.

First of all, thanks for going through the content here and I’m glad you really liked it 🙂

Now with your queries –

1) Yes, if you pay Rs.2 as premium on 90 strike, then breakeven will be 92, and the outlook is bullish
2)If you short the same call option, then your expectation is ‘flat to bearish’and your breakeven will be 88 (90-2)
3) You can short a call option and close the position anytime you wish
4) You cannot buy call and sell call of the same strike simultaneously as it would nullify your position
5) You can buy March series option in Feb and close the same in Feb, there is no problem with the same.
6) Suggest you read this to understand open interest – http://zerodha.com/varsity/chapter/open-interest/

Sir,
I read somewhere that selling options requires a margin amount but do they require margin in hedged positions ( I think , they are probably called covered positions) ?
i.e In a contract like “Buying an At the Money Option and Selling Out of Money Option”

Sir,
First of all thank you for such a beautiful real life explanation. It helped a lot in understanding the concept in real life. I have a question: Say, for a stock having same stock and strike price, a call option is priced higher than a put option having the same underlying. Why is the call option priced higher than the put? Thanks in advance

sir
If I bought nifty call option eg Nifty30June8400CE @ 100 rs one lot (25) . If I hold till expiry. At the expiry nifty at 8700 then can I exercise the option at the expiry.? is there any switch for exercise like square off..? how it works?
And from above example how much profit I made..?

I have read 8 chapters of Options, and I can only say WOW, again understood the whole thing till now theorically. I had seen as many videos and gone thru so many you tube videos on OPTIONS.. so I knew something but it never gave me a full understaning of IV/moneyness , prem for call and put and why is its need, spot prices vs strike prices. All these were greeks to me.
But hats off to you, you have been teaching us the ABCD of the OPTIONS which is priceless. I was contemplating for going to the classes many a times, wh wud have cost me a great deal, but what cud I have learnt in 2/3 days with more than 20/30 students in a batch.
Here I will read and re-read again and again if I have not understood some jargons of the trading.
Thanks once again. I have no questions since I have NEVER traded options on my own. I hope I will b able to comprehend the rest of the chapters too. TOO GOOD.

Hi KARTHIK
i have a small doubt in (8.1) IV
if i remember correctly, from previous chapters, one should buy a call option when he is bullish about the underlying.
But in the very first table of Underlying & CNX Nifty, where the spot price = 8070.
Why one would buy 8050CE, if he is bullish about the underlying,
i know i must have gone horribly wrong somewhere because no one else asked this question and i couldn’t figure it out myself, so just asking to correct me.

I think i got it, please correct me if i am wrong,
The person would have bought the call option when spot price was below the strike price of 8050,
his prediction was correct and now the spot price is moved to 8070, which is Rs.20 above the strike price and hence he will make Rs.20 out of it,(ignoring the premium paid) if he has to execute the contract.
So this was the 2nd half of the story 🙂

Hi, as I have already admitted about the impressive nature of your wisdom, it can be more beneficial if you can make audio-visual (videos) series, as I am sure that the depth of “communication” would certainly surpass than just reading and more importantly a lot of mileage for varsity public!.., right? Kindly, do the needful… Best Regards!!!

Hi I’m sandip yadav , i recently open my acct with zerodha its vry good 4 Trader where re getting study material with support. My question is here if i bought bank nifty bought ce bought at [email protected] so how much premium i ve to pay here.

Hi
I am new to NFO. Suppose I buy Nifty CE 9050 Strike Price. (Exp March), today morning @ 130. When I open the chart of the same, premium rose to 145 +. Then I square off the same contract @ 145. (Which means intraday) What is the effect on my capital. Thanks in advance.
Regards

This page is very resourceful for someone like me who is a beginner. Every thing here is explained in a very subtle way. Kudos.
Just noticed something improper on the content of this page.
In the first section you were explaining why the intrinsic value cannot be negative. You took the example of 920 Call option and Spot price 918. Here’s my understanding, since you cannot exercise the option until the strike price is reached by the underlying and intrinsic value is the money that you will make if you were to exercise your right to buy today. In this case since the spot is below strike so you may never exercise your right to buy the underlying which mean you make zero money, therefore intrinsic is zero.

You are super. Like many even i have gone through multiple videos, pdf files trying to understand options, but that was of very little help. Please clarify few questions. I hope these questions doesn’t sound silly.
1. It has been said through the chapters about the Intrinsic value that it is “NON-NEGATIVE NUMBER”, like say as buyer i am exercising an option on the expire day irrespective of call or put on the last day of the expiry and if the odds are against my strike price then yes i would be losing my premium and then the statement “NON-NEGATIVE NUMBER”, holds good. However when i am Seller/writer of a call or put option, then on the expiry date if the odds are against my strike price then my Intrinsic value will be negative because i will be under huge loss, wouldn’t the statement “NON-NEGATIVE NUMBER” doesn’t hold good in this scenario.
2. How should be the difference in the point from ATM for it to be called “Deep in the money” or “Deep out of the money”.
3. I also see that there is a chapter in regards to Option strategies where there are 12 strategies have been explained which i will go through, however out of curiosity i would like to know if you could suggest few books on option strategies with more strategies. Hope i am not asking for more?

1) You can think about it this way – intrinsic value is a non negative number. If it a non zero number then the buyer makes money and if it is 0, then seller makes money. By the way, if you are a buyer of an option and it turns out to be ITM, then it makes sense to square off the position rather than letting it expire for reasons stated here – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx

2) There is no formal definition for this. I generally consider a 10-15% away from strike (on either direction) as deep strikes.

Hi karthik,
I am new to trading few days back i have opened AC and i was going through chapter 8
Today my Fri was doing intraday in that he bought axis Apr 450pe at call 0.90 and sold at 1.80
But today axis spot price 487.5 if my question is that if strike price is higher than the spot price it is on
Otm right and he should be in loss but how come he gained profit i am getting confused
Pls clarify me

Hi karthik,
What is the difference between intraday and other trading and how does it works : for example if iam trading in intraday suppose if bhel spot price 170.06 and my closest strike price is 160 or 180 ryt
But my guy bought bhel at Apr CE 190 as a strike price and spot price was 170.06 how?
My question is that we can choose any strike price in intraday pls clear my doubt

In OTM calls, if the underlying stock price increases but still below the strike price, then still premium is increasing. Why is it so? I think it should be purely because of IV.
Eg.Federalbk CE May 115. In this case, the price is 111.85 but whenever the price rises to say 112.10, the premium also increases. Since even at 112.10, there is no intrinsic value, volatility should be the only factor affecting premium.Am I right?

I think the premium goes down as spot goes down because of Delta effect. So delta only affects the time value of the premium in all types (OTM, ATM and ITM). In the case of ITMs, does delta affect the intrinsic value or the time value?

Sorry typo It should be OTM instead of ITM.
Due to delta effect, change in spot price will result in very small change in premium value in OTMs. Does that mean this change will add to time value? This I am asking because intrinsic value is zero for OTMs and change in premium will only have to get added to the time value.

sir i have a doubt as follow as I am new in options trading:
suppose I buy a call option of SAIL of strike price 70 ,lot qty is 12000 at 1rs premium and spot price at this time is 65rs
after some days the spot price reaches 72rs and suppose premium also increases to 2rs.and now I exercise my right to sell this call option at this 72rs.
so will my profit be 3rs*12000=36000(i.e. 1rs profit from premium and 2rs profit from difference of current spot price and strike price)
plz correct me if I am wrong.

1) Maybe market considers 9000 as a more likely event than 10000, hence PE is valued higher
2) Supply demand
3) Not sure if this is a common occurrence, anyway, if you spot – you can buy the next month and sell this month I guess 🙂

Hi. karthik.
I have a query.
What are the pros & cons of Selling (writing) Deep In The Money (ITM) Call and Put Bank Nifty weekly expiry options.? The premium received is more in ITM compared to OTM. Can I exercise / square off ITM options before expiry such as after 3, 4 days after selling if in profit.
Thanks in advance.

Thank you for creating these modules.They are extremely simple and comprehensive to learn the basics.

While going through the chapter on moneyness of an option where you have dealt with moneyness of a call and put , the Intrinsic Value formula provided for call options is Spot price – Strike price while for Put options is Strike price – Spot price.

However in the examples you have given in the moneyness of call and put the values of Intrinsic value are not reflecting that.

Example in the moneyness of put option , the strike is 8200 and the spot price provided is 7500.The IV should be = Strike – Spot which is 8200-7500 = 700 while what has been calculated in the module is 7500 – 8200 = -700 (which is 0)

Could you let me know if i am going in the wrong direction or is there an error from your end.

Once again thanks for the modules.I look forward to reading all of them.

i have bought a bank nifty 25100 call on 1 aug at a premium of 180 and spot bank nifty is 25122, expiry is 3 aug. let us have a scenario where the spot bank nifty comes to 25150 on expiry. please give me what would happen to the call option on expiry

You are a excellent teacher for new comers like me. I have read only upto this module and will read the other modules soon, I am confused and have few doubts

I buy a call option for a premium of Rs.5 on nth day, the contract expires on (n+10)th day. On (n+3)rd day i decide to square off because the premium is Rs.7. Is margin required to sell the call option i bought on nth day and willing to sell on (n+3)rd day?. When i square off do i become the call option seller and another person becomes the buyer or is it nullified? because the contract expiry day is only on (n+10)th day. If i square off on (n+3)rd day for a premium of Rs.7 and on (n+10)th day the premium rises even more lets say to Rs.10, What happens to the premium of Rs.5 i paid on nth day to the seller?

Thank you Karthik,
One more doubt. If the call option buyer squares off before contract expiry time, what happens to the contract and how the change in premium at expiry time affects the call option seller?

The contract will continue to exist. It will cease to expire on the expiry day. If the option has an intrinsic value upon expiry, then both the seller and buyer will be settled based on the value of this option.

if i buy a option for next month .
Let’s take example .suppose, in aug month , i bought a option Cipla 600sepCE @ 20 rs ;cipla stock value is 574.
and i take position for one moth . now if option value of Cipla 600sepCE @ ZERO on next day opening . so can i still hold that position ? or it will squareoff automatically ?
or if once value got zero and again 10th of Sep value would be 30 , so can i sell that option @ 30 ? which bought on Aug.

Hi Karthik,
I am new to options trading and have recently got an acct opened with Zerodha and happy with that.
In last one month I have burnt my hands losing about 30k in Fut. And have now come to options to burn it even more I think… ha ha. I am learning options now and your study mtrls, articles and the Q&A are really very helpful in understanding the concept really well and I really appreciate that. You guys are doing a fabulous job. Further, at present I want to do intraday trades in options as I am left very less cash in hand to waste or try my luck. I am confused by the statement that you need to hold the contract till expiry in order to exercise your right but at the same time you say that you can square off your position anytime if you are running in profit. Can you pl elaborate on this a little more plz. Can I buy or sell on the same day. And if I do so, am I trading the stock option or the premium? I know it might sound very stupid but then my understanding is this much only. Thanks for your help.

Sohan, I’m sorry to hear about the losses incurred. Consider this as a fee paid to markets to learn valuable lessons 🙂

There are two things that you can do when you buy options – either hold till expiry or square it off anytime you wish. If you choose to hold till expiry then you will get the intrinsic value of the option as your profit or loss. Intrinsic value is the difference between the spot and strike. However, if you choose to sell the option at any time before expiry, then your P&L will be the difference between the premium paid and received.

I have noticed on expiry of bank nifty many times that the itm option is not traded on its intrinsic value.
eg, 25022= spot
25000ce LTP @₹7 only but it has to be 22 isn’t it, after expiry
the question is what would a buyer get ₹7 or 22 after the expiry.

I want to know
1) In Banknifty option – CE For intraday can we use Bracket Order(BO) ?
2) If yes, what is margin I get ?
3) BO is use consider premium amount
( Ex. If Premium is Rs. 5 and I have Rs. 1000 in demat and suppose margin I get for option – call is *20 then I can invest 20,000/- in option ? )
4) Brokerage +STT + Stamp duty = in total trade value ( in % )
( Ex. Trade value 1000 then total expense rs 20 (I,e – 2.0% of trade value)
Thanks in advance
I am waiting for your guidance

1. For Option Buying, Bracket Order is allowed only for Nifty
2. No leverage is given for Banknifty option Buy orders.
4. Brokerage for all Option orders is a flat Rs 20 regardless of the lot size (Option Premium value might be Rs 1000 but the Contract Value is Strike Price* Lot Size+ Premium* Lot Size)

1. For Nifty Options buying, leverage given is 1.4 times
4. Brokerage is Rs 20, STT will be 0.05% on premium(charged while selling only) and Stamp Duty differs as per your state.
You can calculate the charges in the Brokerage Calculator here

Thanks a lot for the knowledge but I still have some doubt. Would like to know if I’ll be in profit or not by buying Bnaknifty Dec CE 27000 for which the premium right now is 0.05. Suppose I buy this today and the premium goes up to 5 rupees by 15th Dec. But the bank nifty spot price could not Cross 27000 by 15th of Dec. In that case how will the profit calculation takes place?

First of all I can’t thank you and your team enough for creating this amazing resource and keeping it free to access. I have opened an account with Zerodha in May and soon after found this treasure trove of knowledge. I have gone through the modules on TA and FA at least twice, I think. Few days back I started with the modules on F&O. Thanks to these well explained articles with appropriate examples, I’m now able to comprehend Options as a precise and methodical calculated risk-reward instrument instead of a vague gamble. (PS: I’m a big fan of the caricatures that accompanies these articles. I remember you had mentioned the name of the person behind these drawings in one of the comments, forgot the name though)

Moving on to the question I had regarding moneyness of options, this is more for my understanding than a question. Can we interpret the strike options that would result in profit if it was to expire right now (making current spot price = expiry price) as ITM options? Similarly result in loss as OTM?

Nachiketa, I’m so happy to learn that you found the content useful. I’ll pass on the feedback to our illustrator, he will be equally thrilled 🙂

Yes, if you were to exercise your Call option right now, you will get the intrinsic value measured as Current Spot Price – Strike. This would be an ITM option. Likewise, for a Put option, the intrinsic value would be Strike – Current Spot price.

Sir, I chanced upon these modules while browsing on internet. First I will like to thank you for you fabulous work in bringing the varisty and knowledge to the reach of common person.

Sir, my question is intrinsic value of call is spot price -strike price. The ITM call prices should be around this as explained in your aforesaid chapter. But on going through the option sheet of nifty of date 29.12.2017 I calculated the same for strike ITM 10350 it should nifty spot 10530-10350=180. But it is priced at 262.30. Similarly for other ITM strike rates they are higher priced.

Sir, I should take it as overpriced and can be sold or their is time value added in the pricing.

Am I right in assuming that the Intrinsic Value is applicable only for Longs and not for Shorts? As a result, what we term ‘ITM’ for Long Call is actually ‘OTM’ for Short Call and what we term ‘OTM’ for Long Call is actually ‘ITM’ for Short Call, right?

I ask this because if a seller chooses a Short Call strike of 8700 which is Deep OTM as per Section 8.2 above, there is high likelihood that he gets to keep the premium received – and hence he is essentially ‘In The Money’ contrary to what NSE displays the strike as OTM.

Hello sir
Sir I am watching CD option chain
RBI reference rate is 63.4983
So 63.50 strike is ATM but look at their premiums:-
63.50 Call is @ 0.4925/- & IV = 4.47%
63.50 Put is @ 0.2475/- & IV = 4.97%
Call is almost double than Put.
I think there is no intrinsic value in both side both are almost totally time values & I don’t think volatility playing any major role behind the scene.
Then why there is HUGE difference in their value. Could you pls… Explain this ..
Thank you so much sir….

Yeah that’s ok sir, but I didn’t get why there is HUGE difference in their price above. I guess both are ATM option
So their values should close to each other but they are not. In fact CALL option is double than PUT option in price in this case.
Assume:- At ATM STRIKE
Put is at 100/- than CALL at 70 to 140 is digestible but if call is 200/- it’s too much
That is what I want to know about …in my previous query…
Why there is HUGE difference In CALL AND PUT OPTION value at ATM strike
I hope you got my question……
Thank you sir..??

Ah, yes got your question. Clearly, the volatility is not playing a role here as the IVs is similar to both the options. The only explanation is that since the calls are at almost twice the price – the market is perhaps expecting the USD INR to increase (as in the Rupee to weaken against the $). Hence owing to aggressive buying the call option has increased. Now if this explanation is true, the volumes of calls should be much higher compared to Puts. Can you validate that?

VERY GOOD OBSERVATION! YOUR REPLY IS GIVEN BELOW AND THE CUSTOMER VALIDATED IT
Ah, yes got your question. Clearly, the volatility is not playing a role here as the IVs is similar to both the options. The only explanation is that since the calls are at almost twice the price – the market is perhaps expecting the USD INR to increase (as in the Rupee to weaken against the $). Hence owing to aggressive buying the call option has increased. Now if this explanation is true, the volumes of calls should be much higher compared to Puts. Can you validate that?
ONE DOES NOT EXPECT BLACK SCHOLES TO CAPTURE DEMAND & SUPPLY, BUT YOU HAVE PREDICTED THE SITUATION CORRECTLY! QUITE AN ACHIEVEMENT CONGRATS !

Hello sir,
You have mentioned “Before we wrap up this discussion, here is a question for you – Why do you think the intrinsic value cannot be a negative value?
To answer this, let us pick an example from the above table – Strike is 920, spot is 918, and option type is long call. Let us assume the premium for the 920 Call option is Rs.15.”

If the buyer can buy the stock at 918 in the open market, why would he exercise his right to buy the stock at 920. Hence the option became worthless. So for this reason an intrinsic value can never become negative. Is my understanding correct sir??

Thank you so much for all your efforts of responding queries.
Aishwarya

Thank you for your reply. But the above scenario is on day of expiry. Its for the reason why the intrinsic value can never become negative. (in referene to the above chapter). Pls correct me if Im wrong.

Hi Karthik,
I just wanted to say that this is awesome work. I have just started taking options trading seriously, but I wanted to know more before I could jump in. I accidentally happened come across your awesome work. I have gone through the 11 chapters in just a matter of 2 hours, I couldn’t stop myself from praising the one who framed this. The examples were kept simple, language was kept basic, making sure that even a novel reading kind of approach would register all the stuff into the brain. Thanks a lot once again. I would go through all the modules and write to you if I have any queries.

I’m sorry if I’ve understood it wrong, but I thought IV for call options is Max[Spot Price – Strike Price] and vice versa for put options. In that case, any value below the current level 8060 will have a -ve value and hence 0 IV. In the example above for Moneyness of Call option, it’s mentioned the other way round. Let me know. Thanks!

As a lot of persons has earlier said that they come to this great work only by chance; it is true in my case ALSO.
The material has been put in a quite simple manner so that it can be easily understood by anyone. I find it so interesting. I am reading it 3rd time. Each time I get more and more knowledge. Thanks to the author for presenting the material in a simple manner. I am finding the stock options as a treasure as I have been and investor in cash market. Though i am using it as a hedging. Earlier in cash market i could not have decided my exit.
Sir I bought 305 shares of Indus Ind bank @ 1700. At the rate of 1800, I came to know about options. As I was in a profit so I decided to sell a call of 1920 @ 9 keeping in mind that i will sell my stock at the strike price.
Pls guide me about the consequenses and what would be my profit or loss if the spot price goes above 1920. and what should be my strategy.
Thanks & regards,

Sir while scanning the increase in OI for the expiry 31.05.2018, it is observed that there is huge increase in OI for call options strike 8600 and 9000. Both these strikes are deep ITM having no time value premium. Sir can you explain the reason for the increase in OI for these strikes. Regards

Thanks for the details.
I have one doubt which no one in my circle answered it to my conclusion.
On 17th May 2018 BankNifty was @26200-26300 range it was bearish.
I was tracking BANKNIFTY 17th May PE of Strike price 27000 and premium was 700+(ITM)
My Question was if I sell/Write this 27000PE contract I was in a gain of premium and it was expiry day for that contact. But the end of the day I saw an increase in premium price as Banknify went down by 200 points but as it was expiry I was expecting the price to reduce to zero and seller of PE would gain profit. End of market price was 900+. I am missing something here. 🙂 Please help.

Thanks, Kartik for the reply.
Increase in premium is clear but on expiry as I know price crease to zero.
Suppose someone sells Put of that strike price will be entitled to gain all the premium.
But as I said EOD price was not zero but 900+ and that was an expiry day for that option.

The strike you chosen was ITM(if it expired as ITM) …I think ITM options are immune to time decay and most OTM options are more likely to expire worthless and ITMs expire with some worth. plz correct me if i am wrong

Dear sir, today is the start of a new contract. I visited NSE website to have a look at the option chain for ‘FEDERAL BANK’ and to my surprise not all strike prices mentioned in the chart had a Premium value, some of them were represented by a ‘-‘ .

When I am checking at today’s scenario Axis Bank June 18 530 CE , where spot price is 519.10.
so IV = 519 -530 = -11 which is not realistic as you said.
But when I am checking it at Nifty Website in option chain , its showing IV 30.71.
How is it? Can you please clear?

Hi Karthik, as I post this BNF is at 27146 and the 27000CE is at 158 which is almost the intrinsic value of the call. But, the 27100 CE is at 93, which is 2X of its intrinsic value, i.e. there’s time value involved.

Why such a difference in the ATM call? Both should be at almost intrinsic or nearby, right?

Dear sir,
Firstly sorry to go a bit off topic but only an expert like you can answer such a thing.
I came to know about a gambler called Bill Benter who is said to be world’s richest gambler & have amassed 1billion $ just by betting on horse races. But the strange fact is that he didn’t just randomly bets on any horse, instead he has developed a statistical model which could very accurately predict the winner of the race. But sir, how in the world is this possible ? A horse race would be won by the most fastest horse, how come is it related to mathematical formulas anyway. Is mathematics really so powerful ??

Manas, I don’t know about Bill Benter, but this sure sounds possible and it does not surprise me. Have you watched the money, Moneyball? If not, I’d suggest you do to understand the role of stats in game theory 🙂

Sir, i tried to open an account with zerodha so i clicked on “open an account” in the website, entered my details & clicked “continue to sign up” but nothing is happening. I tried multiple times but nothing happened. Then i downloaded kite, tried signing up through there but it says “duplicate entry lead”. What to do…

Sir, I want clarity on this. We know that if in the money option is not squared off in expiry, STT is charged on full settlement. I had a bank nifty 27500 PUT which ended up in the money. It closed at 27478 last week expiry. Now SEBI gives option of “DO NOT EXERCISE” these days. I did not get that from zerodh side. Hence I contacted support. They said it’s automatic if profit is less than STT than option won’t be exercised. I understand that STT would have been higher, so it’s a loss saver for me. But suppose in some stocks we don’t find a buyer on expiry, or bids aren’t what in the money option deserves, and we are forced to keep the option. In that case what to do then? We will never credited our profits? I can’t even see your shadow in back. It’s someone else.Dont you think “Do not exercise” option must be provided like other brokers?

In above case I had 25 lots of bank nifty . So, 22 points (2700-2478) will make it 22000 Rs profit on 25 lots. Had I squared off my purchase premium was around 2 and it ended at 15, so 13 points would be 13000 profit in that case (if I squared off before 3:30). Shouldn’t I get 13000 credited because my option is considered “not exercised” by your system automatically?

Dear sir,
This question may sound stupid but sir i am really intrigued to know is it really possible ?.
Sir, suppose i have 1 crore rupees to trade. Now if buy call option of premium 30 by using whole 1 crore then i would be able to buy 4444 lots. & if it moves just 1 point above, that is 31, it is showing a whopping profit of 315,174 rupees.
That means if someone do this only 4 times in a day properly he crosses 10 lakhs per day in earnings.
So is it really possible to earn such crazy money if we have a large capital ??

Dear sir,
I recently read somewhere about what people were saying as exchange lot restriction is 100 lots per order. But i am not able to get any info. on it. I have heard people trading many many lots intraday but never heard about this 100 lots per order restriction. Is this true ?

Sir, can u please tell about open interest in terms of lots ?? Like suppose lot size is 75 & open interest for a particular strike is 4 million. So does that mean that 4 million lots have been traded today ?

Understanding that we don’t have to wait till the expiry of the option, however what if the exchange happens to square off the trade on the expiry day, then what is the penalty for the buyer of an option and what is the penalty for the seller of an option, irrespective of the underlying and strike price.

This is the image taken after the closing hours of market on 15th Nov 2018.

My queries related to the Image that I have shared.

1. Banknifty 15th Nov 26100 PE – Since it is the expiry day of the week the price of the option contract has come down to Rs.0.05/-. which is understandable.
2. Banknifty 15th Nov 26100 CE and Banknifty 15th Nov 26000 CE – Even though it is the expiry day the prices have not come down and even at the last minute we can see the prices were increasing which shows that people were buying and selling the option contract at the last minute. Please clarify:
A) Is it not necessary to have the prices of the option contract coming down to zero on the expiry day?
B) What will happen to the option Contract from the buyers point of view and from the sellers point of View?
C) How does P&L will look like from buyers perspective and from seller perspective?

Hello karthik sir, i have no words for the entire zerodha team… Great great job… My question is that why we see small lot size on some Strike Prices whereas minimum lot size is already pre determined and kindly let us also known that on which types of strike prices may be option buyers don’t get out when they feel profitable or something like that they feel that they are blocked because of suddenly nobody wants to buy the contract (cause buyers now want to square off their opened position).. Thanks a lot again you guys did a brilliant and highly appreciable work for all types of investors and traders…

Sir, today when bank nifty spot was at 26940 ,the 26700CE was trading at 205, which should atleast be ideally 27940-26700=240 and plus suitable time value? can u explain why so?today is expiry day..JAN 31 Expiry

Hey Karthik,
W.r.to perspective of viewing stock, I have following query/conflict to me to understand..

#1) When the spot price is below the strike price, say spot price is Deep ITM then stock price increase to reach strike to become ATM, then premium will decrease, isn’t it..?? and over the period spot becomes OTM, then if I sell my stock, only premium will be calculated, right. But when stock is at OTM then premium is lesser value than D ITM..??

#2) When does strike price gets change.? My actual query is, if everything (spot, strike, premium) is getting changed over time, which value I have to consider as constant and start using the formula’s explained here.?

We know this is the ATM option as 8050 strike is closest to the spot price of 8060. So we will not bother to calculate its intrinsic value.”
since 8050 is ATM, during the expiry will this option strike also be worthless or or since there is a intrinsic value of 10 (8060-8050) the amount equal to 10*lot size would be our Profit?

2.I have also heard that the first strike in OTM is the ATM ( rather than the closest to spot price). In the example mentioned in this chapter it should be 8100 as the spot has crossed 8050 and CMP is at 8060.Is this true?

1) If the market expires at 8060, then you’d get 10*lot size, provided its a CE
2) It is always ‘in and around’ the current market price, so look for those strikes
3) It is the central strike, which coincides with the current stop price. It has the closest chance of transitioning into an ITM option. Holds good for both CE and PE.